Meta

The ECB’s momentous meeting: QE is coming, but on German terms

WHEN the European Central Bank’s (ECB) governing council meets on January 22nd, it will take a historic decision. Among the main central banks, the ECB alone has abstained from a big programme of quantitative easing involving the creation of money to buy sovereign bonds with the aim of spurring growth and inflation. The economic case for QE in the euro area is overwhelming: the feeble economic recovery that has followed Europe’s double-dip recession is faltering; headline inflation has turned negative and longer-term inflation expectations have also declined to a worrying extent. Mario Draghi, the ECB’s president, seems determined to adopt QE in some form, but he will have to compromise on the way that the risks are shared among the euro-zone national central banks in order to get the policy through.Insiders expect a programme of sovereign-bond purchases of around €500 billion ($580 billion) to be announced on Thursday. Anything less would be likely to disappoint markets that have already been anticipating a move by the ECB to adopt QE, causing, for example, the euro to weaken. The need to purchase government bonds arises from the scale with which the ECB needs to intervene. The central bank wants to raise the balance-sheet of the Eurosystem (the ECB along with the euro zone’s 19 national central banks) from €2.2 trillion to €3 trillion. Since late last year it has been …